As an NRI (non-resident Indian) selling property in India is nothing short of a nightmare. There are several factors (such as below) considering which a lot of NRIs take a step back.
- Multiple unproductive trips to India
- Process understanding
- Evolving tax structures and exemptions
- Identification of the buyer
- Managing Daily life/Office schedules alongside managing everything else in India remotely through multiple vendors in India
Tax understanding & Optimization among others is a major hurdle as this is a major tangible impact area. Profit in a couple of years by way of appreciation in real estate in India is the objective for many individuals before leaving to settle abroad.
But if a major chunk of that’s profit is deducted as tax, is a scary thought for most and hence they choose their Indian properties to let it be!
Its important to understand key points under the new regime that is going to be impacting real estate sales for NRIs. Here is a summary of key points regarding the new Capital Gains Tax regime, as per the FAQs released by the Income Tax Department in response to the Union Budget 2024:
| Key Change | Details |
| Holding Period | <24 months = Short Term Capital Gains
>24 months = Long Term Capital Gains |
| Changes announced in | Only the LTCG Cases where the earlier tax rate 0f 20% with indexation has been changed to 12.5% Flat without any indexation benefits that the NRIs can now not claim |
| Applicable on Which Properties | Properties bought after the 23rd of July 2024 are mandated to be taxed @12.5% without indexation.
Properties bought before the said date still have a choice to make between the old tax structure and the new. i.e. choose between 20% with indexation and 12.5% without indexation whichever is lower. |
| Rollover Benefits | No changes have been made to rollover benefits. These can still be availed under sections 54, 54F, and 54EC, with conditions. |
| Implementation Date | The new tax provisions come into effect on July 23, 2024, applying to transfers made on or after this date. |
Key Tax Implications for NRIs
Key Tax Implications for NRIs: Comparing the Old and New Regimes Post-Budget 2024
The 2024 Budget has introduced significant changes to the tax landscape for NRIs, especially concerning the sale of property in India. Understanding the difference between the old and new regimes is crucial for NRIs looking to manage their tax liabilities effectively.
1. Capital Gains Tax on Sale of Property
- Old Regime:
- Short-Term Capital Gains (STCG): The holding period for short-term gains has been extended to two years. If the property is held for less than 2 years, the gains will be classified as short-term and taxed at the applicable slab rate, which remains up to 30%. This change may result in a higher tax liability for those selling property within a shorter holding period.
- Long-Term Capital Gains (LTCG): For properties held for more than two years, the gains were considered long-term and taxed at a flat rate of 20% after applying indexation. Indexation allowed for adjusting the purchase price to account for inflation, thus reducing the taxable gains.
- New Regime (Post-Budget 2024):
- STCG: No Change
- LTCG: Major Change is announced here. Date of acquisition of property is the new pivot for Tax applicable and the Strategy to chosen
- Properties bought before 23rd July 2023 still have a choice to make between the old tax structure and the new Structure. i.e choose between 20% with indexation and 12.5% without indexation whichever is lower.
- Properties bought before 23rd July 2023 will have a mandate to undergo 12.5% tax without indexation
2. TDS (Tax Deducted at Source) on Property Sales
- Old Regime:
- TDS for LTCG: 20% TDS was applicable on the sale of property classified as long-term capital gains.
- TDS for STCG: A 30% TDS was deducted on short-term capital gains, aligning with the income tax slab rate.
- New Regime (Post-Budget 2024):
- TDS for LTCG: The TDS rate remains at 20%, but the process for applying for a lower TDS certificate has become more stringent, with additional documentation and stricter scrutiny, particularly for high-value transactions.
- TDS for STCG: The TDS for short-term capital gains continues to be at 30%. The extension of the short-term period to three years means more transactions may fall under this higher TDS bracket.
3. Impact on NRIs:
Overall impact of the new scheme on NRIs from overall tax outlay perspective has only a marginal difference but the process becomes more efficient for sure. However NRIs holding ancestral properties may observe higher tax outlays.
- Indexation: Prima-Facie without indexation computation of capital gains may sound like higher tax liability; it actually is not for most properties. NRIs may be able to save more tax overall. Only in-cases where the properties bought at a very aggressive price but have seen exponential growth and the property was in possession for a great no of years may be a case where the outflow is marginally higher than even sometimes with indexation.
- Stricter Compliance for TDS: The new regime introduces stricter compliance measures, making it essential for NRIs to ensure all necessary documentation is in place to avoid penalties or delays in obtaining lower TDS certificates.
Common Mistakes and Penalties
NRIs often face penalties due to a lack of understanding of the complex tax laws. Some common mistakes include:
- Deduction of TDS by Buyer: Sometimes NRIs don’t realize that the sales price agreed, is inclusive of TDS component and land up losing a lot of money
- Incorrect TDS Deductions: Failure to ensure the correct TDS deduction by the buyer can lead to significant penalties. NRIs should obtain a lower or nil TDS certificate if they plan to reinvest the capital gains in another property or invest in other types of Tax saving bonds. Form 13 in-itself is a tool to help NRIs reduce the upfront TDS burden.
- Improper Filing of ITR: NRIs must file an Income Tax Return (ITR) in India to report the sale of property, even if they have paid TDS. This is the only way to recover the TDS deductions if the overall taxability was lower than the deducted TDS.
- Misclassification of Income: Misclassifying the gains as short-term or long-term can lead to incorrect tax payments which can raise red flags and a possible scrutiny which may lead to hefty penalty if found incorrect by the department. NRIs should ensure that they correctly classify their capital gains based on the holding period of the property.
Strategies to Minimize Tax Complexities
To navigate the tax challenges introduced by the 2024 Budget, NRIs can take several strategic steps to minimize their tax obligations and simplify the process of selling property in India:
- Obtain a Lower/Nil TDS Certificate:
NRIs can apply for a lower or nil TDS certificate if they believe that their actual tax liability will be lower than the standard TDS deduction. This certificate can significantly reduce the amount of TDS deducted at the time of sale, helping to improve cash flow and avoid overpayment. The application process has become more stringent under the new regime, so it’s crucial to ensure all necessary documentation is accurate and complete. - Utilize the Capital Gains Account Scheme:
If you’re unable to reinvest the gains before the due date for filing your Income Tax Return (ITR), depositing the gains in a Capital Gains Account Scheme (CGAS) can defer tax payments until you make the reinvestment. This scheme allows NRIs to benefit from tax exemptions under Section 54 or 54EC while providing additional time to reinvest the proceeds into another property or specified bonds. - Leverage Section 54 Exemptions:
Section 54 of the Income Tax Act allows NRIs to claim exemption from long-term capital gains tax if the gains from the sale of a residential property are reinvested in another residential property in India within the stipulated period. The reinvestment must be made within one year before or two years after the sale, or within three years if the property is under construction. This can be a highly effective strategy to reduce or even eliminate your capital gains tax liability, particularly under the new tax regime, where maximizing such exemptions is critical. - Hire an Expert Consultant:
Given the complexities involved in NRI taxation, particularly with the recent changes, it is advisable to consult a tax advisor who specializes in NRI taxation. They can provide tailored advice, help you navigate the various rules, and ensure compliance with all legal requirements. A tax advisor can also assist in optimizing your overall tax strategy, ensuring proper documentation, and advising on repatriation of funds.
Conclusion
Selling property in India as an NRI involves navigating a maze of tax regulations, especially with the recent changes in the 2024 budget. By understanding the tax implications, avoiding common mistakes, and seeking professional advice, NRIs can minimize their tax liabilities and ensure a smooth transaction. Staying informed about the latest tax rules is essential for making well-informed decisions and avoiding costly penalties.
For personalized assistance in managing your NRI tax obligations and property sales in India, reach out to Brivan Consultants—your trusted partner in navigating the complexities of NRI taxation and real estate transactions.
Frequently Asked Questions (FAQs)
1. What are the TDS rates applicable when an NRI sells property in India?
When an NRI sells property in India, TDS (Tax Deducted at Source) is applicable as follows:
- 20% TDS for Long-Term Capital Gains (property held for more than 2 years).
- 30% TDS for Short-Term Capital Gains (property held for 2 years or less).
These TDS rates are before applying any surcharge or cess, and NRIs can apply for a lower or nil TDS certificate if they are eligible, particularly if they plan to reinvest the gains
2. How can NRIs minimize their tax liabilities when selling property in India?
NRIs can minimize tax liabilities when selling property in India by:
- Claiming Exemptions (Sections 54 & 54F): Reinvest capital gains in residential property to avoid taxes.
- Investing in Bonds (Section 54EC): Invest in specified bonds within six months to claim exemptions.
- Deducting Expenses: Reduce taxable gains by deducting sale-related expenses.
- Filing Returns: File tax returns to claim refunds on excess TDS and utilize exemptions.
These strategies can help reduce taxable gains and optimize tax savings.
3. What are the penalties for not filing an Income Tax Return (ITR) as an NRI?
Failure to file an Income Tax Return (ITR) by the due date can attract several penalties, including:
- Interest on unpaid tax under Sections 234A, 234B, and 234C.
- Possible prosecution in severe cases where taxes have not been paid or returns are consistently not filed.
To avoid such penalties, NRIs are advised to file their ITR accurately and on time. If you miss the deadline, consider consulting a tax professional to address any issues and mitigate penalties.
4. Can NRIs repatriate the proceeds from selling property in India?
Yes, NRIs can repatriate proceeds from the sale of property in India up to $1 million per financial year. To do so, they must:
- Pay Applicable Taxes: All taxes, including capital gains tax, must be settled, usually verified via Forms 15CA and 15CB.
- Use NRO Account: Deposit the sale proceeds into a Non-Resident Ordinary (NRO) account before repatriation.
Consulting with financial experts is recommended to navigate this process smoothly.